Is there an implied duty of 'good faith'?
YAM SENG v INTERNATIONAL TRADE CORPORATION [2013]
An overriding contractual duty of ‘good faith’ is a concept imposed by law in many continental European jurisdictions but not one which is generally implied under English law (at least not in those terms). In this decision the Court implied two specific obligations into a distribution agreement, portraying them as aspects of good faith.
Facts:
- Y entered into a distribution agreement with ITC under which it was granted exclusive rights to distribute Manchester United toiletries in certain duty free outlets and in certain specified countries.
- After about a year, Y maintained that ITC had committed various breaches going to the root of the contract. These included failing to act in accordance with an implied obligation of good faith, particularly by:
- allowing other retailers in Singapore to sell the products at lower prices than Y was permitted to offer them for duty free sales;
- instructing or encouraging Y to incur marketing expenses for products which ITC was unable or unwilling to supply and offering false information on which Y relied to its detriment.
- Y claimed damages for breach of contract.
Decision:
The Court concluded as follows:
- ITC was in breach of contract in a number of respects including acting in bad faith in misleading Y about the steps taken to ensure that the domestic retail price in Singapore was not lower than the duty free price. ITC was under an implied duty not to knowingly give false information.
- Y was justified in terminating the agreement.
Points to Note:
- Under English law a duty of good faith is implied into certain categories of contract, for example contracts of employment and contracts between partners or others whose relationship is characterised as one involving special elements of trust. However, a general requirement of good faith is not a duty implied by law into all commercial contracts. Nevertheless, the judge said that it was possible to follow the established methodology of English law when implying terms, in order to imply such a duty in any ordinary commercial contract based on the presumed intention of the parties and asking what would the contract, read as a whole against the relevant background, reasonably be understood to mean? The relevant background was said to include shared values and norms of behaviour and “it is these which establish the content of the duty of good faith by reference to the parties' intentions, assessed objectively”.
- The Courts routinely imply certain obligations, including to act honestly, to cooperate and not to exercise a contractual discretion arbitrarily, which are in effect aspects of good faith. As illustrated in this case, such intentions include an intention not to knowingly provide false information or to act contrary to an established industry assumption.
- The judge commented that any requirements of good faith will depend on the context and will require a core value of honesty. The requirement that parties will behave honestly is, according to the judge, so obvious that it goes without saying. Such a requirement is also necessary to give business efficacy to commercial transactions.
- He went on to say that some commercial contracts involving a longer term relationship and ‘substantial commitment’ will require a higher degree of communication, cooperation and predictable performance based on mutual trust, which are implicit in the parties' understanding of what they would each give and receive, and are necessary to give business efficacy to the arrangements. Such ‘relational’ contracts might include joint venture agreements, franchise agreements and long-term distributorship agreements.
- The judge also described the duty as one of good faith ‘and fair dealing’. He said “what constitutes fair dealing is defined by the contract and by those standards of conduct to which, objectively, the parties must reasonably have assumed compliance without the need to state them”.
- Factors which led the judge to imply the relevant terms included the fact that the agreement was ‘skeletal’ without a lot of detail, was not professionally drafted and that there was a common industry assumption that duty free prices would be lower than domestic retail prices.
- This decision appeared to indicate a move away from the principle that there is no general duty of good faith under English law. In some instances, specific duties of good faith may be implied to be decided on a case-by-case basis. How far these duties extend beyond a simple duty to act honestly remains to be seen.